News

13 September 2006

NLMK’s Board of Directors approves key parameters of the second phase of the Technical Upgrading Program

The Board of Directors has approved the key parameters of the second phase of the Technical Upgrading Program, covering the period from 2007 to 2011. The Program was developed in accordance with the sustainable growth strategy of Novolipetsk Steel (LSE: NLMK), which is aimed at maintaining the Group’s position among the world’s most efficient steel companies.

Key strategic goals of the second phase of the Technical Upgrading Program:

1. To increase crude steel production from 9 million tonnes per year up to 12.4 million tonnes per year. 
The Technical Upgrading Program foresees growth of crude steel production to 12.4 million tonnes per year (+40%) by 2011. The increase in crude steel production volumes will primarily be achieved by the construction of new blast furnace #7, with capacity of 3.4 million tonnes per year. NLMK is also planning to renovate three out of five blast furnaces and BOF (Basic Oxygen Furnace) Shops #1 and #2. The major investments in the segment are the following:

- Blast furnace division – USD0.9 bln
- Steelmaking division – USD1.0 bln
- Infrastructure and auxiliary facilities investments – over USD0.1 bln

2. To develop iron ore and coking coal assets to achieve 100% self-sufficiency of the steelmaking segment in major raw materials, taking into account the projected increase in steel production volumes.

Implementation of the second phase of the Technical Upgrading Program foresees the construction of an iron-ore pellet plant at Stoilensky GOK with production capacity of 3 million tonnes per year by 2009. It is planned to increase production of iron-ore concentrate in Stoilensky GOK from 12.5 million tonnes up to 15 million tonnes per year. 
According to the Technical Upgrading Program, 100% self-sufficiency in coking coal will be reached by 2009, while the annual production increases to 11 million tonnes by 2011. 

The major investments in the segment are the following:

- Stoilensky GOK – USD0.5 bln
- Altai-koks – USD17 mln
- Zhernovskoe-1 – USD0.5 bln

3. To increase production of finished flat steel products from 5 million tonnes up to 9.5 million tonnes per year through the modernization of rolling facilities in Lipetsk and acquisition of new rolling assets.

NLMK will increase production of finished flat steel products and balance its value chain through pursuing strategic acquisition opportunities with respect to high quality rolling facilities in the company’s core export markets. NLMK plans to acquire rolling facilities with capacity of at least 3 million tonnes per year. 

In addition, NLMK will enhance its own production facilities. At NLMK’s facilities in Lipetsk, the Technical Upgrading Program provides for substantial investments into the renovation of rolling plants, with both upgrading of existing and building new technological production units. 
As for the recently acquired rolling facilities, NLMK plans to modernize production of electrical steel at VIZ Stal facilities in Yekaterinburg as well as the production facilities of DanSteel. The total investments into modernization of existing rolling assets under second phase of the Technical Upgrading Program are USD0.9 bln. The major projects are the following:

- Modernization of hot-rolling mill and construction of reversing mill in Lipetsk  
- Modernization of electrical steel production
- DanSteel development program 

4. To enhance fuel and energy facilities in Lipetsk
The second phase of the Technical Upgrading Program foresees an increase in capacity of the electricity generating facilities in Lipetsk. NLMK will generate 60% of its electricity requirements on site by 2011 compared to 37% in 2005. The 60% of generated electric power will be based on blast furnace and coke gas processing.  The company also plans additional projects with respect to fuel and energy facilities. The total investments into modernization and enhancement of fuel and energy facilities are USD0.3 bln 
Total investments in the second phase of the Technical Upgrading Program will amount to USD4.4 billion by 2011. The second phase of the Technical Upgrading Program is planned to be financed from cash flow from operating activities and existing cash funds.

The estimated IRR for projects under the second phase of the Technical Upgrading Program is 18%.

Vladimir Lisin, Chairman of the Board of Directors of NLMK, comments:
“NLMK’s sustainable growth strategy is oriented towards maximizing our key competitive advantage; low cost steel production platform in Lipetsk. The substantial increase in crude steel production in Lipetsk will be balanced by the development of raw materials assets and strategic acquisitions of high quality rolling facilities. The projected increase in the production of finished flat steel products will be based on rolling our own slabs with 100% self-sufficiency of raw materials.

Along with our Technical Upgrading Program, enhancing the profitability of the Company remains our key objective. All our actions in the M&A area and development of production facilities will be directed to the improvement of NLMK’s financial results.”

NLMK has completed the first phase of the Technical Upgrading Program covering the period from 2000 to 2005, committing total investments of USD1.3 billion. The following principal objectives were accomplished:

- Increase the efficiency of the production process and maintain low cost production structure. The cost of production per tonne of slabs on a consolidated basis was  USD163 in H1 2006;


- 10% growth of steel production volumes resulted in increasing NLMK’s sales revenue and profitability;


- 30% growth of production in high value-added segment from 2001 to 2005;


- Improvements in quality. The whole NLMK’s product portfolio has complied with requirements set forth in ISO 9000 (2000 edition) since 2003 as well as International Standard ISO/TU 16949:2002 since 2004.


- Lessen environmental impact of company’s operations. The reduction of atmospheric emissions from 2001 to 2005 accompanied by growing production volumes was 13.5%.